October 25, 2017 / 2:25 PM / a year ago

Instant View: Bank of Canada holds rates steady, pledges caution

TORONTO (Reuters) - The Bank of Canada held interest rates steady on Wednesday, as expected, saying that while less stimulus will be required over time the bank will be cautious as it considers future moves given the risks and uncertainties facing the economy.

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“They’re saying that the tightening will be gradual, but I think they’re making clear that further rate hikes at the moment seem likely.”

“As well, they’re suggesting the output gap has closed in the third quarter, if you look at their mid-point estimate.”

“That contrasts with July when they were talking about an output gap at the mid-point of about half a percentage point of excess supply. That calculation would normally suggest that policy is going to need to be tightened, although they are arguing that for various reasons there is room for more economic growth without inflation rising materially. At the moment inflation is below target so allowing a bit of excess demand by their calculation will probably help them achieve the inflation target.”

“Bottom line, they’re still suggesting in our view that interest rates will move higher, they’re stressing gradual so maybe that’s tempering market expectations that there was going to be a more rapid tightening.”

“There’s still the risk they could go before the end of the year under their current forecast.”

“We’re still leaning towards a move before the end of the year, but we’ll be watching that third quarter growth closely.”

“If it remains above potential I think the bank could continue to remove stimulus before the end of this year and continue through 2018.”


“The general theme is cautiousness once again. I think it echoes a lot the last speech by Governor (Stephen) Poloz a month ago.”

“With the kind of language they used ... it makes you question whether they will be ready to move (hike) in December.”


“There’s definitely a dovish edge to the statement and MPR. The bank is certainly emphasizing, ‘we’ll take a very cautious approach to further tightening’.”

“All of that suggests the Bank will take a very cautious approach in further raising interest rates. Certainly, it sounds like it wants to more time to access the impact on the economy of previous rate increases and strengthening of the currency. And of course, it will take time to see the impact of OFSI’s rule changes on the housing market, and it could take quite some time before we see the end-game of NAFTA renegotiations.”

“We were thinking January (for the next interest rate increase), but that’s at risk now, we could push it out further into 2018.”

Reporting by Fergal Smith, Alastair Sharp; Editing by Denny Thomas

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